Is GrandTech C.G. Systems (GTSM:6123) The Next Multi-Bagger?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at the ROCE trend of GrandTech C.G. Systems (GTSM:6123) we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for GrandTech C.G. Systems:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.26 = NT$326m ÷ (NT$2.6b - NT$1.4b) (Based on the trailing twelve months to September 2020).

Therefore, GrandTech C.G. Systems has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Electronic industry average of 11%.

See our latest analysis for GrandTech C.G. Systems

Historical performance is a great place to start when researching a stock so above you can see the gauge for GrandTech C.G. Systems' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of GrandTech C.G. Systems, check out these free graphs here.

The Trend Of ROCE

GrandTech C.G. Systems has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 123% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

Another thing to note, GrandTech C.G. Systems has a high ratio of current liabilities to total assets of 53%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From GrandTech C.G. Systems' ROCE

As discussed above, GrandTech C.G. Systems appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the stock has returned a staggering 152% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a final note, we've found 3 warning signs for GrandTech C.G. Systems that we think you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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